There’s Only One Way Left to Squeeze Juice Out of Groupon

Any hopes of a big shareholder payday rests on a GRPN buyout

Groupon (NASDAQ:GRPN) has put together a 60%-plus rally since mid-November, and it’s done so the “fun” way, featuring moves like a 23% surge last Friday, and Monday’s 9% snapback.

It’s enough to make an investor queasy … but it’s probably nirvana for professional traders, it is nirvana.

But why the crazy action?

The catalyst likely was Tiger Global’s November disclosure of a 9.9% stake in Groupon — essentially an “all-clear” sign that it was safe for the fast-money hedge funds to start getting aggressive with GRPN.

But that hasn’t made Groupon any more attractive on a fundamental basis.

Groupon’s core daily-deals business is rapidly breaking down. Merchants already have realized (or are coming around to the fact) that daily deals are costly yet don’t lead to customer loyalty. On the user side, there seems to be growing fatigue at the constant barrage of email offers. And that’s showing up in the numbers — Evercore Partners’ (NYSE:EVR) Ken Sena has recently pointed out that the company’s revenues are falling at a rate of about 20% per quarter!

To make-up for the revenue shortfall, Groupon has quickly built a business to sell physical goods from companies like Dell (NASDAQ:DELL) and Garmin (NASDAQ:GRMN). And while it has gotten traction, the margins are razor-thin, which could put pressure on cash flows.

In light of all this, it seems the only viable option for real shareholder value is Groupon finding a buyer. While possible suitors include Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT), the most intriguing name in the fray is Google (NASDAQ:GOOG).

As I mentioned in a post yesterday, Google does not care about the daily-deals business. Instead, it wants to find a way to get a chunk of the local e-commerce business, and that means it’ll need an extensive sales infrastructure. Groupon’s 6,000 headcount across 40 companies would just do the trick.

That said, despite optimism over last week’s uncomfirmed report, a deal is far from sure thing. Groupon has been a wild company, with several accounting restatements, executive turnover and a business that’s rapidly becoming commoditized. Google’s no slouch and it’s no pauper — it might actually fare better using its huge cash hoard to organically build its own business.

So for investors, the best strategy concerning GRPN is to keep watching the show … from the stands, that is. While traders might be able to make a buck off continued volatility, there probably will be scant gains in the long haul.

Based in Silicon Valley, Tom Taulli is in the heart of IPO land. On a regular basis, he talks with many of the top tech CEOs and founders trying to find the next hot deals and finding out which start-ups are stinkers.

A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.

Tom is routinely quoted in the media about upcoming deals with his interviews on CNBC and Bloomberg TV, but he is eager to take your questions too. You can message him on Twitter at @ttaulli. And feel free to weigh in via the comments section on any of his IPO Playbook posts.